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Can a Discounted Premium Bill Create an ERISA Plan?

The recent case of Gooden v. Unum Life Ins. Co. of Am., 2016 WL 3059752 (E.D. Tenn. March 30, 2016) involved a familiar scenario - whether a "list bill" arrangement constitutes an ERISA plan.  The plaintiff was a physician who worked for a clinic in Florida between 1987 and 2007.  In 1991, an insurance broker sold several individual disability income policies to some of the physicians who worked at the clinic, including Dr. Gooden.  However, the individual doctors purchased their own policies - the clinic itself had no involvement whatsoever.  However, because more than three of the doctors participated, Unum set up a "FlexBill" which offered premium discounts of approximately 15% since a single bill was sent to the clinic and the physicians paid their premiums through payroll deductions. 

When Dr. Gooden left the clinic in 2007, Unum sent him forms that allowed him to continue the policy by paying his premiums directly, although the discount was no longer provided.  In 2013, Dr. Gooden submitted a claim for benefits to Unum, which was denied.  When he filed suit for breach of contract and bad faith under Tennessee law, Unum removed the case to federal court asserting ERISA preemption.

The court examined the ERISA "safe harbor" regulation, which exempts group-type insurance if the following criteria are met:

 (1) No contributions are made by an employer or employee organization;

(2) Participation [sic] the program is completely voluntary for employees or members;

(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

29 C.F.R. § 2510.3-1(j). 

Although the parties agreed that the second and fourth criteria were met, Unum denied that the first and third criteria were met. 

The parties' principal point of contention was whether the discount constituted an employer "contribution."  The court examined several cases on this issue, but disagreed with the cases that found the discount constituted an employer contribution.  The court concluded that there was no evidence a contribution had been negotiated by the clinic. 

But even if the employer had negotiated the discount, the court followed Rosen v. Provident Life & Accident Ins. Co., No. 2:14-cv-0922-WMA, 2015 WL 260839 (N.D.Ala. Jan. 21, 2015), which found that a negotiated discount was not enough to remove coverage from the safe harbor and observed: 

To hold otherwise would be to present an employer who did not wish to be drawn into ERISA with a nonsensical choice: either refuse to allow its employees to use payroll deductions for insurance premiums (which is specifically allowed under the safe harbor), or refuse to allow the insurer to offer its employees a premium discount (which would risk involving the employer in negotiating the terms of the policy, thereby potentially endorsing the plan under the third criterion of the safe harbor). 

Thus, the court found that Unum's' FlexBill program did not create an ERISA plan since neither Unum nor the employer paid any portion of the premiums. 

Turning to the third criterion, the court determined that the employer did not "endorse" the Unum coverage.  Merely advising employees of the program or permitting the program to be publicized to employees was inadequate.  The court explained: "The proper focus in assessing endorsement is on an employee's perspective: whether it would be reasonable for an employee to conclude, from his or her own observation of the employer's activities, that the employer had endorsed the policy."  The court also listed five factors from Sixth Circuit case law from which endorsement may be discerned:

(1) Has the employer played an active role in either determining which employees will be eligible for coverage or in negotiating the terms of the policy or the benefits thereunder?

(2) Is the employer named as the plan administrator?

(3) Has the employer provided a plan description that specifically refers to ERISA or that the plan is governed by ERISA?

(4) Has the employer provided any materials to its employees suggesting that it has endorsed the plan?

(5) Does the employer participate in processing claims?

(citations omitted). 

Since none of those factors were found in this matter, the court agreed that the clinic remained neutral. Summing up, the court pronounced, "There simply is no showing of substantial involvement by the Gessler Clinic in the creation or administration of the insurance program." 

This ruling finally injected some common sense on this issue.  This case and the Rosen ruling from Alabama are the most thoughtful cases we have seen on this issue. It defies logic and is contrary to every federal judge's complaint about overcrowded dockets that courts seem to strain to find the existence of an ERISA plan when there was no intent to create a plan.  

Other cases that have reached the same conclusion include: Schwartz v. Provident Life & Accident Insur.Co., 280 F.Supp.2d 937 (D.Ariz. 2003); Lanpher v. Unum Life Ins. Co. of Am., 2015 WL 5157519 (D. Minn. September 2, 2015))(finding employer involvement too tenuous to create ERISA plan); Weinrauch v. N.Y.Life Ins.Co., 2013 U.S.Dist.LEXIS 8105 (S.D.N.Y. January 16, 2013) (because plaintiff took over premium payments and restructured policies, court rejected ERISA preemption); Heral v. Unum Life Ins.Co. of America, 2008 U.S.Dist.LEXIS 94418 (E.D.Ark. November 18, 2008) (principal of company who bought his own policy several years before buying separate policies for employees did not subject his policy to ERISA).  Ames v. Jefferson Pilot Financial Co., 2007 U.S.Dist.LEXIS 69007 (D.Ariz. 9/17/2007). 

There was a possible additional basis for finding the absence of an ERISA-governed plan; however, the court's recitation of the facts is unclear.  If all of the policies were sold to physician owners of the clinic and no other employees participated, ERISA's applicability would also be precluded by a second safe harbor - 29 C.F.R. § 2510.3-3.  That regulation explains that if there are no employee participants in a benefit program, there is no plan. 

 

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